The legends of the Caucasus…

In a recent paper, in the International Business Review, entitled “The Legends of the Caucasus: Economic Transformation of Armenia and Georgia”  I attempt to evaluate the past two decades of macroeconomic, business, and institutional transformation in the two small open economies.

All standard clarifications on the imperfections of the post-socialist transition aside, I argue, that the two are open to international business that follows the local context.

Neither of the two is a success case by the conventional measures — but perhaps that should not be guiding ideal for us to be able to objectively analyze the Caucasus duo. Instead, the key should be a relative contrast between what had actually taken place following the reforms and social collapses of the early 1990s and what has evolved since then.

The story isn’t rosy but yet it is not one of desperation either. Indeed the hierarchical market economies concept (often attributed to the Latin American economies, e.g. here) may be relevant here on a macro level. On a micro scale, the segmented business systems framework (e.g. here on African case) may be a relative guide to scholars in characterizing the two economies.

However, there is a clear pattern of maturing  industries (e.g. IT and agriculture in Armenia  transportation and agriculture in Georgia) – emerging in the post-1990s collapse. Armenia’s entrepreneurial drive is strong as evidenced by a number of surveys (including this one): the managers are willing to take on business risk and operate under conditions of limited finance, yet the country’s innovative ability contributes up to 3% of the world’s total NEW inventions (e.g. Picsart – based in Armenia, etc.). Georgia on the other hand relies on its established productive and infrastructure capacity to drive its growth.

None of the above is solidified, of course, and headwinds (economic, social, political) are strong. Hence, many have looked at the Diaspora-potential. But as I argue in the paper and elsewhere, the diaspora in each case is more of a dispersion–with random sporadic action towards the homeland.

This critically matters for Armenia, cut-off in blockade, and by distance from its main destination markets (including Russia to which most diversified exports in agriculture are sent). In fact some diaspora surveys suggest Armenia’s FDI being largely driven by diaspora entrepreneurs whereas Georgia, leveraging its advantageous geography, is able to attract a more balanced trade and FDI mix from across regions (see the exports exposure and external risk discussion in the paper). Still other measures suggest the “diaspora” potential has not played out to the fullest extent yet (even despite high remittance share and some FDI projects) in either of the economies.

Yet, the above might in fact be a solid argument for the relative inner strength of the combined human capital capacity and economic base (developed within the Five Forces model in the paper) of the two economies.

It is perhaps premature to expect either Armenia or Georgia to be joining the ranks of high-income economies, despite any such aspirations. However, there are not out-right failures either. And even the minor successes of the past two decades should serve as guides to businesses seeking new markets, educated labor force, and evolving  institutional framework as either stand-alone or access points into yet unknown high potential markets.

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